This memorandum opinion from the Court of Chancery addresses cross-motions for judgment on the pleadings related to the redemption of an option to purchase shares of Chrysler Group LLC (“Chrysler”) after it had emerged from bankruptcy. Plaintiff and Counterclaim Defendant, Fiat North America LLC (“Fiat”) is a limited liability company organized under the laws of Delaware and a wholly owned subsidiary of Fiat S.p.A. (“Fiat Parent”). Both Fiat and Fiat Parent are engaged in the design, manufacture, and sale of automobiles. Defendant and Counterclaim Plaintiff, UAW Retiree Medical Benefits Trust (the “VEBA”) is a voluntary employees beneficiary association that funds medical health care benefits for retired and to-be-retired members of the United Auto Worker’s Union (the “UAW”).
On April 30, 2009, Old Car Co LLC (formerly known as Chrysler LLC) filed for protection under title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York. After a new Chrysler emerged from bankruptcy, the UAW asserted that Chrysler was bound by prior commitments to provide retiree medical benefits to the UAW made before Chrysler filed for bankruptcy. Ultimately, on June 10, 2009, the UAW and Chrysler entered into a settlement agreement (the “Settlement Agreement”). The Settlement Agreement provided, among other things, that the retiree medical benefits obligation would be transferred to Chrysler’s retiree plan and that the VEBA would be responsible for funding such plan. In return, Chrysler agreed to: (1) transfer assets valued at $1,589,500,000 to the VEBA; (2) give certain Class A limited liability membership units representing 67.69% of the fully diluted ownership of Chrysler to the VEBA; and (3) issue a note from Chrysler to the VEBA with a principal amount of $4,587,000,000 and an implicit interest rate of 9% to be paid pursuant to a defined schedule (the “VEBA Note”). The VEBA Note is, in turn, governed by an indenture.
In August 2010, Chrysler Canada, Inc. (“Chrysler Canada”) entered into a similar settlement agreement with the Canadian Auto Workers Union (the “CAW”) which resolved Chrysler Canada’s obligation to provide retirement benefits to the CAW. As part of that settlement, Chrysler Canada issued the Canada Health Care Trust Note (the “CHCT Note”) to the Canadian Health Care Trust.
On June 10, 2009, Fiat, the VEBA, and the United States Department of Treasury (the “U.S. Treasury”), executed a Call Option Agreement (the “Call Option Agreement”) that granted Fiat certain rights to purchase (the “Call Option”) 40% of VEBA’s equity interest in Chrysler. The Call Option Agreement contained an exercise price formula designed to approximate the “fair market value of shares at the time of exercise.”
As an initial public offering had not yet occurred at the time Fiat exercised the Call Option, the Pre-IPO Option Exercise Price was “equal to one percent (1%) of the Company Equity Value.” Company Equity Value” was, in turn, defined as the product of the “Market Multiple” times the aggregate of Chrysler’s reported “EBITDA” for the most recent four financial quarters for which financial statements have been delivered or were required to be delivered, less Chrysler’s “Net Industrial Debt” as of the date of Chrysler’s consolidated financial statements that most recently were delivered or required to be delivered.
Also relevant to the dispute, on May 18, 2009, prior to entering into the Call Option Agreement, Chrysler applied to the Department of Labor (the “DOL”) for an exemption from the purportedly prohibitive sections of ERISA. On October 5, 2009, the DOL issued a Notice of Proposed Exemption reiterating statements made by Chrysler to the DOL that “[t]he exercise price will be determined pursuant to a formula which is designed to arrive at the fair market value of the interests” and explicitly noting the Notice of Proposed Exemption was conditioned on the truthfulness and accuracy of Chrysler’s application. On April 26, 2010, the DOL granted Chrysler an individual exemption from certain prohibited transaction restrictions of ERISA (the “PTE”).
In a June 8, 2012 letter, Fiat notified both the VEBA and the U.S. Treasury, both of which held membership interests in Chrysler resulting from Chrysler’s bankruptcy, of its intent to exercise the Call Option with respect to 54,154 units of Chrysler (the “Called Shares”). Fiat’s price calculation showed it would be required to pay the VEBA $139.7 million pursuant to the Call Option Agreement. When the VEBA failed to deliver any membership units to Fiat, Fiat brought suit contending that the VEBA’s failure to deliver the Called Shares placed the VEBA in breach of the Call Option Agreement, and further sought specific performance in the form of delivery of those shares.
The VEBA counterclaimed, asserting that certain adjustments to Fiat’s calculation of the purchase price were necessary and, as a result, the purchase price was well in excess of $139.7 million. First, the VEBA argued that “Net Industrial Debt” should not include either the VEBA Note or the CHCT Note. Second, the VEBA disputed the inclusion in Fiat Parent’s EBITDA of net income attributable to non-controlling interests in Chrysler. The VEBA also asserted that Fiat miscalculated New Industrial Debt in other respects but contended discovery was needed to resolve those disputes. Finally, the VEBA asserted that federal law barred delivery of the Called Shares to Fiat under the Call Option Agreement because certain conditions in the DOL’s PTE had not been satisfied.
In addressing the parties’ contentions, the Court recognized the Call Option Agreement was governed by the substantive law of New York and held that, because the terms of the agreement were unambiguous, under New York the consideration of extrinsic evidence was not appropriate.
Turning to the parties’ dispute, the Court first considered whether Fiat correctly included the VEBA Note and the CHCT Note (collectively, the “Notes”) in the “Net Industrial Debt” of Fiat Parent and Chrysler. The Call Option Agreement defines “Net Industrial Debt” as “total indebtedness for borrowed money …; provided that the calculation of Net Industrial Debt shall exclude obligations in respect of retirees.” The parties’ disagreement focused on whether (1) the notes are “indebtedness for borrowed money”; and (2) whether the Notes are “obligations in respect of retirees.”
Fiat contended the Notes qualified as “indebtedness for borrowed money because, (1) Delaware and New York law recognize that notes evidence indebtedness for borrowed money; (2) both the Settlement Agreement and the Indenture refer to the VEBA Notes as “debt”; and (3) Chrysler had treated the Notes as debt in its public filings. The VEBA countered that Chrysler did not borrow any money in procuring the Notes, and instead issued the Notes in exchange for terminating certain obligations purportedly owed to Chrysler retirees.
Noting that neither Delaware nor New York case law provided much guidance for interpreting “indebtedness for borrowed money” the Court turned to the background of the Notes, finding they were a direct product of the Settlement Agreement entered into to resolve Chrysler’s obligations to provide retiree medical benefits to the UAW and the CAW. The Court further recognized that while, theoretically, Chrysler could have settled the UAW’s and CAW’s claims by paying cash, Chrysler did not have the cash to do so. Instead, Chrysler elected to pay the VEBA with Chrysler equity and the VEBA Note. The Court equated Chrysler’s actions in this regard to having “financed” the settlement of claims and incurred the Notes as a result of such financing. Contrary to the VEBA’s contentions, the Court held that its interpretation did not render the “for borrowed money” language superfluous but rather recognized that for practical purposes Chrysler had to borrow money from the VEBA to finance its settlement.
The Court’s view that Chrysler incurred financing in connection with the Settlement Agreement was buttressed by the terms of the Settlement Agreement and the Indenture incorporated therein as both of those documents equated “notes” with indebtedness for borrowed money and further defined “Debt” as “notes, bonds, debentures or other similar evidence of indebtedness for money borrowed.” The reference to “other similar evidences of indebtedness for money borrowed” suggested to the Court that the parties understood notes, bonds and debentures themselves to be evidence of indebtedness for borrowed money. The Court further held that to the extent Chrysler did not treat the Notes as debt for tax purposes, the relevance of such tax treatment is outweighed by Chrysler’s public filings which treat the Notes as “debt.”
The Court next addressed whether the Notes reflected “obligations in respect of retirees” such that they should have been excluded from Net Industrial Debt. The Call Option Agreement states, “that the calculation of Net Industrial Debt shall exclude obligations in respect of retirees.” The parties’ disagreement turned on the Court’s interpretation of the phrase “in respect of.” The VEBA contended the phrase should be broadly construed so as to include all obligations that “relate to” or “concern” retirees. Fiat, on the other hand, contended the phrase should be construed more narrowly to mean only those obligations directly owed to retirees or their plans. Fiat drew a distinction between obligations to the retirees themselves as opposed to obligations to the trusts, i.e., the VEBA, whose sole obligation is to fund the plan.
The Court held that under either party’s interpretation the Notes would not constitute obligations in respect of retirees because, although the VEBA is required to use the proceeds from the Notes and other consideration to provide retiree medical benefits, the Notes themselves are obligations only to the holder. Because the Notes are transferrable, the VEBA could have sold the Notes to a third party and used the proceeds of that sale to provide for retiree medical benefits. The Court posited that if a third party were to hold the Notes under those circumstances it would be inconceivable that the Notes would be held to constitute “obligations in respect of retirees.”
The Court next considered whether, in calculating the Fiat Multiple, Fiat erred by including net income attributable to the VEBA’s non-controlling interest in Chrysler for determining Fiat Parent’s EBITDA. The VEBA asserted the Call Option Agreement required the use of the consolidated net income attributable to the owners of Fiat Parent, not the consolidated income attributable to Fiat Parent in its financial statements. The VEBA noted that, in contrast to the definition of EBITDA, which refers to the consolidated net income of a Person, “Net Industrial Debt” references the financial information of the entity and its subsidiaries each “as reported on a consolidated basis.” Fiat responded that the “as reported” language in the definition of “Fiat Multiple” made clear that the relevant EBITDA is the EBITDA derived from the reported information in Fiat Parent’s financial statements and no further calculations were necessary. Fiat also contended it was not feasible to calculate an EBITDA that excludes non-controlling interests from reported data because Fiat Parent’s financial statements do not report interest charges, income taxes, and depreciation attributable to non-controlling interests.
The Court concluded that construing the term EBITDA to include income attributable to non-controlling interests was the only reasonable interpretation of the relevant provisions of the Call Option Agreement. The Court’s conclusion was informed by the fact that under both GAAP and IFRS consolidated net income on Fiat Parent’s financial statements would include Fiat Parent’s non-controlling interests. The Court also noted that Fiat Parent does not break out interest charges, incomes taxes, depreciation or amortization attributable non-controlling interests such that construing the term “as reported” to require complex and difficult adjustments to account for non-controlling interests was inconsistent with the Option Call Agreement’s unambiguous language and the intent of the parties. The Court further rejected the VEBA’s proposed interpretation as inconsistent with a common understanding of consolidation.
The Court next turned to whether Fiat erred when it subtracted Fiat Parent’s financial services debt from Fiat Parent’s consolidated debt for purposes of calculating total indebtedness for borrowed money. Ultimately, the Court denied Fiat’s motion for judgment on the pleadings on this issue, finding it was not clear from the pleadings and Fiat Parent’s financial statements whether inter-company loans were entirely included in “intersegmental financial receivables” or whether a portion of the debt of Fiat Parent’s financial services subsidiaries represented inter-company loans.
The VEBA took further issue with Fiat’s calculation of EBITDA, specifically whether “charges” in the sense of “non-cash charges” or “extraordinary charges,” should be calculated on a net basis. Fiat responded that the Call Option Agreement could have used the word “net” as it did for “net income” but the parties instead chose to use “charges” without any qualification. Ultimately, the Court found that the term “charges” in the Call Option Agreement was ambiguous as it was susceptible to at least two reasonable interpretations and denied Fiat’s motion for judgment on the pleadings.
Finally, the VEBA contended that applicable law barred the VEBA’s sale of Chrysler shares at the price calculated by Fiat because it would violate the conditions of the PTE, including that the formula used in the Call Option Agreement, as applied by Fiat was designed to approximate the fair market value of the Called Shares at the time of their exercise. In effect, the VEBA asked the Court to determine that Fiat’s redemption of the Called Shares would invalidate the currently effective PTE, thus rendering Section 406(a) of ERISA applicable.
In response, the Court, sua sponte, determined, on a preliminary basis, that it lacked subject matter to decide the issue of whether the conditions allegedly imposed by the DOL in the PTE are satisfied and/or whether the PTE is valid. The Court noted that federal courts have previously recognized that the U.S. District Court has exclusive jurisdiction to determine whether an exemption from prohibition against transactions between an ERISA plan and a related party applied because certain conditions in an exemption purportedly had not been met. Further, a pertinent Federal Regulation provides that “[t]he determination as to whether, under the totality of the facts and circumstances, a particular statement contained in (or omitted from) an exemption application constitutes a material fact or representation is made by the [DOL].”
In addition, the Court declined to award Fiat specific performance of the Option Call Agreement because Fiat had only succeeded on some, but not all of its claims. For similar reasons, the Court reserved judgment on Fiat’s request for attorneys’ fees until conclusion of the matter.
The full opinion is available here.